The collapse of FTX marks the end of the road for several exchange traded products providers which have been forced to shut down their products activities to focus on surviving.
Singaporean crypto asset manager and custodian Eqonex is selling its businesses to pay creditors and looking for a custodian for its crypto exchange-traded note (ETN) in Europe just months after entering a tie-up deal with the payments arm of Binance and shutting down its crypto exchange to focus to its asset management and cryptocurrency custody business lines.
The launch of the Eqonex Bitcoin ETN (EQ1B) on the Deutsche Boerse in July and a series of senior hires to facilitate the launch of a structured products unit marked Eqonex’s strategic shift in the summer, which was overshadowed by the “difficult” decision to wind-up its crypto exchange business a month later.
Retail investors are shying away from these structured products for lack of impetus in the industry - Laurent Ksiss, CEC Capital
The collapse of the FTX Exchange and FTT token in November triggered what Eqonex described in a letter to shareholders as a ‘painful inflection point’ which triggered a vicious cycle resulting in the company being unable to meet its loan repayment obligations, and its financial health deteriorating further.
‘Despite our goals and our pioneering ‘regulation-first’ approach, we must now acknowledge that we have not delivered on the ambitious goals we set for ourselves as one of the first listed, regulated digital asset ecosystems,’ stated Eqonex in its last communication.
“The retail (more than institutional) crypto ETN market is currently witnessing a real dilemma,” Laurent Kssis, crypto ETP specialist at CEC Capital, told SRP.
“Retail investors are shying away from these structured products for lack of impetus in the industry/market and the cost of running retail crypto ETNs is making very hard for these businesses to keep going as break-even point is never achieved within the first year.
“A case of too many too quickly. Very reminiscent to the Eurostoxx 50 ETF, at one point there were more than 50 sx5e strategies, it fragments the market and ultimately companies close them down.”
According to Ksiss (right), Eqonex noteholders will fall part of a call option by the issuer and its collateral agent and the latter will redeem the units and return any proceeds minus a fee, to sell the underlying assets, back to the noteholders.
“This will be a decent litmus test that the ETN structure functions and does exactly what it is supposed to do. Again, the collateral agent is a guarantor to the noteholders and will trigger the procedure to redeem the ETN back into cash to noteholders.”
The expected outcomes now would be for a new wallet provider to be found as Digivault winded down its operations yesterday (7 December) and the ETN to continue functioning, or a mandatory redemption to happen and proceeds to be returned to investors.
On the other hand, the lack of clarity over whether the product will continue trading, radio silence with the security trustee and whether investors will be able to withdraw assets if the issuer becomes insolvent, show the ETN’s situation remains uncertain.
With the FTX collapse being labelled as the crypto market Lehman Brothers moment, crypto ETN investors would learn first-hand that with these products they are not just exposed to asset price risk but also issuer and counterparty risk across the value chain.
‘We are now seeking to find the best possible outcomes for all involved, with particular focus on our regulated businesses, Digivault and Bletchley Park, and our Nasdaq-listing, all of which, with strong use cases, still have potential to operate under a new iteration and management teams,’ stated Eqonex.
Bitpanda shuts entire crypto ETP range
Austrian crypto investment platform Bitpanda has closed its suite of ETPs linked to digital assets to focus in the consolidation of its business operations amid a deteriorating market environment and a significant change of sentiment among investors.
According to Bitpanda, the turmoil in the crypto market over the course of this year has led to ‘fundamental changes’ in the way the firm operates and resulted in the decision to discontinue the range of crypto trackers which includes the Bitpanda Bitcoin ETC (YBTC); Bitpanda Cardano ETC (YADA), Bitpanda Polkadot ETC (TDOT), Bitpanda Ether ETC (KETH) and Bitpanda Solana ETC (TSOL).
All the products have delisted from the Deutsche Boerse as a result of the company’s decision - details around the redemption of the ETPs will take place ‘in the coming weeks’.
The company CEO’s Eric Demuth (right) and Paul Klanschek stated that the decision to exit the crypto ETP offering was ‘purely for strategic reasons’ to free up resources ‘to focus on the areas that we see as crucial to our long-term success’.
The shockwaves of the FTX collapse continue to reverberate in the crypto ETP market which has seen a number of providers including CoinShares, 21Shares and VanEck having to suspend launches of FTX ETPs earlier this month.
ETC Group also announced that it has closed its proof-of-work (PoW) ethereum ETP less than two months after launch.
Global crypto ETP AUM down 17% in November
ETPs sold globally using cryptocurrencies as underlying assets have seen a 17% decrease in the assets under management (AuM) value during the month of November, closely mirroring the 15% drop in the cryptocurrency market value during the same period, according to Fineqia International.
The total AuM decreased to US$21 billion from US$25.3 billion between 1 Nov. and 1 Dec. across 163 listed ETPs, according to Fineqia Research.
Two ETPs that had FTX's token (FTT) as their underlying assets have ceased trading, while six new ETPs were added, increasing the total number of ETPs listed from 159 to 163 so far in 2022. The new ETPs listed did not affect the total metrics, that have a combined AUM of approximately U$5 million.
On a year-to-date (YTD) basis, the AuM of crypto ETPs decreased 64%, similar to a 61% drop in the broader crypto market. Despite a 50% increase in the number of ETPs to 163 in November compared with 109 in January, their overall AuM was US$21 billion compared to US$58.5 billion in Januanry.
The price of Bitcoin dropped by 65%, while Ethereum decreased by 67% during the Jan.-Nov. 2022 period. The overall value of cryptocurrencies decreased 15% to about US$850 million in November, more than 60% lower than US$2.2 trillion in January.
‘We're still facing contagious effects of the FTX failure that has consequentially weakened the financial position of other companies and made some of them insolvent,’ said Fineqia CEO Bundeep Singh Rangar (above-right).
A number of crypto-related entities revealed some amount of exposure to collapsed cryptocurrency exchange FTX including Binance, BlockFi, Coinbase, Coinshares, Galaxy Digital, Genesis Global Trading, and Voyager Digital, among others.
Ethereum prices have plummeted due to selling by people who are believed to have hacked FTX - the AuM of ethereum (ETH) denominated ETPs decreased by 18%, while the cryptocurrency's price dropped by 23% to about US$1,200 from almost US$1,600. Their AuM fell to US$5.3 billion from US$6.5 billion.
ETPs holding bitcoin (BTC) dropped almost 17% to US$14 billion from US$16.8 billion in November compared to the value of BTC, which suffered a 20% decrease to about US$16,500 on 1 November compared to US$20,600 a month earlier.
ETPs representing alternative coins decreased by 15% and those with a basket of cryptocurrencies dropped by 17%.
BTC… towards irrelevance?
The European Central Bank (ECB) believes that bitcoin as a cryptocurrency is in its ‘last push towards irrelevance’.
According to the ECB, the BTC seeming stabilisation is not signalling a ‘breather on the way to new heights’ but instead ‘an artificially induced last gasp before the road to irrelevance’.
The European lender noted in an article signed by Ulrich Bindseil (right) and Jürgen Schaaf that current regulation of cryptocurrencies is partly shaped by misconceptions.
Since Bitcoin is based on a new technology - DLT / Blockchain - it would have a high transformation potential, claims the ECB.
‘Firstly, these technologies have so far created limited value for society - no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it,’ it said.
The ECB is of the view that BTC should not be treated in regulatory terms and thus should not be legitimised as it appears to be ‘neither suitable as a payment system nor as a form of investment’.
‘Similarly, the financial industry should be wary of the long-term damage of promoting bitcoin investments - despite short-term profits they could make (even without their skin in the game),’ it said. ‘The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses.’
According to the ECB, bitcoin is not suitable as an investment as it does not generate cash flow (like real estate) or dividends (like equities), and cannot be used productively (like commodities) or provide social benefits (like gold).
‘The market valuation of bitcoin is therefore based purely on speculation,’ stated the article.
‘Speculative bubbles rely on new money flowing in. Bitcoin has also repeatedly benefited from waves of new investors. The manipulations by individual exchanges or stablecoin providers etc. during the first waves are well documented, but less so the stabilising factors after the supposed bursting of the bubble in spring.’
Main image: Phongphan Supphakank/Adobe Stock